Nestlé U.S. chief looks for brands to fix or toss

AnnieGasparro

BOSTON--When Paul Grimwood took over Nestlé SA's struggling U.S. operations a year and a half ago, he faced an unlikely problem: Hair nets.

Nestlé's seven independent businesses in the U.S., which run a total of 87 factories, were buying hair nets and safety shoes from more than 100 suppliers. Because the units weren't talking with each other, Nestlé, the world's biggest food company, couldn't get the best bulk discounts in its biggest national market. Now Nestlé says it uses just "a handful" of suppliers.

The same thing happened with flavorings. By combining purchasing departments across businesses, he chopped the number of flavor suppliers in the U.S. to four from 48.

"If you keep rolling that out across the scale and size of the whole U.S. market, it makes a phenomenal difference to the profitability," Mr. Grimwood said in a recent interview.

Nestlé is counting on the 51-year-old Englishman to fix its sagging U.S. business, which accounts for about a quarter of its 92.16 billion Swiss francs ($103.37 billion) in sales but has slowed to a near standstill.

Beyond hair nets and flavorings, he must deal with a sprawling hodgepodge of brands in the U.S., some of which are languishing. Oh Henry and 100 Grand candy bars are long past their heyday, market share for Juicy Juice children's fruit drinks has declined for years, and Ovaltine, the chocolate malted-milk powder that first arrived in the U.S. market around a century ago, no longer bothers to run TV ads in the U.S.

Since arriving, Mr. Grimwood has slashed the number of Nestlé's product variations, such as flavor or size, by 43% to simplify operations. Dropping the calzone version of Hot Pockets and the quesadillas Lean Pockets, for example, reduced the types of dough it has to make.

Nestlé also has begun shedding businesses that no longer fit its strategy or are in weak categories. It sold most of the Jenny Craig diet business in November and PowerBar athletic snack brand in February. Mr. Grimwood said "there may be one or two more brands in the portfolio we release in due course."

Last year, Nestlé's U.S. revenue rose 1.5% in dollar terms, well below the 4.6% average over the previous three years. The weakness contributed to Nestlé missing a long-standing target for sales growth, and has weighed on its stock price. Since the beginning of the year, Nestlé shares have trailed the Stoxx Europe 600 Food & Beverage companies, underperforming peers such as Unilever PLC.

In a recent interview, Paul Bulcke, Nestlé's chief executive, acknowledged the U.S. operations needed a shake-up. Mr. Grimwood, he said, is the man "to establish who we are in the U.S."

Mr. Grimwood spent a decade at candy maker Mars Inc. before moving to Highland Distillers, a Scotch whisky maker. In 2001, he joined Nestlé's Purina PetCare business and then moved to the candy operations before taking over Nestlé's entire U.K. and Ireland business. In October 2012, he was sent to Nestlé's U.S. headquarters in Glendale, Calif.

Mr. Grimwood's next target will be frozen food, Nestlé's second-biggest category in the U.S., after pet food. Like other food companies, Nestlé has been hit by a rapid shift away from frozen meals, as consumers gravitate to fresh foods that they think are healthier. Many of its frozen brands, like Lean Cuisine and Hot Pockets, have lost relevance with consumers.

Operating profit for Nestlé's U.S. frozen business has fallen an average of 7% annually over the past three years, but would have risen 4% a year if Lean Cuisine were stripped out, according to the company.

Mr. Grimwood said Lean Cuisine is in Nestlé's "fix box." Nestlé has begun to reposition Lean Cuisine--a pioneer in the diet food segment that suffered from rising competition and shifting tastes--to appeal to people pursuing healthy lifestyles rather than weight loss. While the brand isn't as big as it once was, Lean Cuisine still generates nearly $1 billion in annual sales.

"Once we fix it, then we'll see what the next strategic steps are," Mr. Grimwood said. The same sentiment applies to Juicy Juice, which until a few years ago was losing money.

Another priority is ice cream, a Nestlé staple that has been losing market share to cheaper store brands. Banking on innovation, Nestlé last year came out with Haagen-Dazs gelato and Edy's and Dreyer's branded coconut water frozen fruit bars to try to tap in to the trends. And Butterfinger cups, a line extension of a classic candy, has boosted the Butterfinger base business by 49% from January to May.

"Nestlé has some serious work cut out for them," said Thomas Russo, who oversees a stake in Nestlé valued at about $1 billion at Gardner Russo & Gardner LLC, a U.S. advisory firm in Lancaster, Pa. He said some of Nestlé's brands had "been starved of investment."

"You can't make everything a priority," Mr. Grimwood said, referring to brands like Ovaltine, 100 Grand and others that have a following but aren't going to be sales engines.

Some of Nestlé's U.S. businesses are thriving. The Purina PetCare business, which represents about a quarter of all Nestlé sales in the U.S., has been growing 4% a year in North America. Its candy business has also staged a turnaround in recent years, after being unprofitable for years.

Nestlé also expects high-margin revenue to rise after acquiring the North American rights to a handful of skin-care products it will sell through Galderma, its dermatology business. The U.S. and Canada represent more than half the global market for medical aesthetic treatments.

"Our portfolio will always change and move," Mr. Grimwood said. "We're prepared to fix issues that we have, and if we can't fix them, divest."

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